Qualified Settlement Funds (QSFs): An Overview

A Qualified Settlement Fund (QSF) is a tax-advantaged legal entity established under Treasury Regulation 1.468B-1 to hold settlement proceeds from lawsuits. QSFs provide a structured and efficient way to manage settlements, benefiting plaintiffs, defendants, and attorneys by offering financial flexibility and tax planning opportunities.

How QSFs Work

Establishment: A QSF is created under court supervision to receive and distribute settlement funds. It must meet three criteria:

It is established pursuant to a court order.

It resolves or satisfies legal claims.

It qualifies as a trust under state law.

Funding: Defendants make settlement payments into the QSF, satisfying their liability. Once funded, the defendant is released from further obligations, and the QSF takes over fund administration.

Management: A QSF administrator oversees fund distribution, ensuring compliance with legal and tax obligations. The funds can be invested, allowing potential growth before distribution.

Distribution: Claimants can receive structured settlements, lump sums, or a combination of both, depending on their financial and tax considerations.

Benefits of a QSF

Defendant Benefits:

Immediate liability resolution upon funding the QSF.

Tax deduction for settlement payments in the year funded.

No involvement in claimant disputes over fund allocation.

Plaintiff Benefits:

Time to evaluate tax implications and settlement options.

Ability to structure payouts for financial stability and tax efficiency.

Protection from premature taxation, allowing strategic financial planning.

Attorney Benefits:

Simplifies settlement administration.

Allows attorneys to manage fee payments efficiently.

Provides flexibility for deferred attorney fees.

Conclusion

QSFs serve as a valuable tool for managing settlement proceeds efficiently. They ensure compliance, optimize financial outcomes for all parties, and provide the flexibility needed in complex litigation settlements.